Ed Dolan | Apr 15, 2013 02:01AM ET
Leo Tolstoy wrote that all happy families are alike, but each unhappy family is unhappy in its own way. Much the same is true of economies. Maybe that was what EU Commission President Jose Barosso had in mind when he said recently that, “it is a completely different situation in Cyprus and in Slovenia.” Different, but in many ways no less dangerous. For those struggling to keep up with the ever-evolving euro crisis, here are some of the key ways in which the impending crisis in Slovenia differs from—and resembles—the others.
The macroeconomic context
As in many other countries, the crisis in Slovenia, which now centers on the banking system, has developed against a background of broader macroeconomic problems. Not long ago, Slovenia’s economy was doing well. The country was one of the ten that entered the EU in 2004. Like others in its cohort, it initially enjoyed rapid economic growth. The following chart, which compares Slovenia’s economic growth since 2000 with selected other countries, shows that before the global financial crisis, Slovenia looked a lot like Poland, one of the EU’s biggest success stories. Since the crisis, it has looked more like Portugal.
One factor was exchange rate policy. Beginning in 2005, Slovenia held its currency, the tolar, within a narrow trading band against the euro. In January 2007 it abandoned the tolar altogether to become the first of the new member states to officially join the Eurozone. On the whole, the new members with floating rates (illustrated by Poland and the Czech Republic in the chart) had a relatively easy ride through the initial phase of the crisis because nominal depreciation could absorb some of the shock. For example from mid-2008 to early 2009, the Polish zloty depreciated some 30 percent against the euro in nominal terms, helping give Poland the distinction of being the only EU member to avoid a recession. The Czech koruna depreciated by 17 percent over the same period, moderating the recession there. By comparison, euro members Portugal and Slovenia, along with Estonia, which was firmly locked to the euro by its currency board, suffered deeper initial downturns.
Another key macroeconomic factor was fiscal policy. One measure of a country’s fiscal policy stance is its structural fiscal balance, that is, the surplus or deficit that its government budget would have if its economy were operating at full employment (or more precisely, at potential real output). A move toward deficit in the structural balance indicates fiscal stimulus, whereas a move toward surplus—what economists call fiscal consolidation—indicates fiscal restraint.
The following chart shows structural balances for the same five countries. Estonia, together with its Baltic neighbors Latvia and Lithuania (not shown) took strong fiscal consolidation measures as soon as the crisis hit, making their recessions even deeper than they otherwise would have been. The other countries shown all applied a greater or lesser degree of fiscal stimulus. The stimulus phase lasted longest in Slovenia, which did not begin consolidation until 2012. The stimulus no doubt moderated the initial downturn, but it also caused a sharp increase in the debt-to-GDP ratio. Slovenia’s debt ratio, which as recently as 2007 was just 30 percent, is expected to rise above the EU’s permitted threshold of 60 percent by the end of this year.
The available policy options are further constrained by growing public protests against austerity, which contributed to the collapse, in January, of Slovenia’s previous government. The new government led by Alenka Bratusek has been reduced to making vague promises to pursue economic growth and fiscal consolidation without hampering the expansion. So far, those promises have not fully satisfied the protesters. One of them, who recently marched with a banner reading, “We are not right and we are not left but we are the people who are sick of you,” told a reporter for Original post
Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.